Optimal subsidies for distributed photovoltaic generation: Maximizing net policy benefits

Abstract

Distributed photovoltaic (PV) generation is a promising pathway for reducing carbon emission and meeting energy demands in electricity sector. Subsidies are essential to accelerate its deployment. This paper aims to study the optimal subsidy levels for distributed PV generation from the perspective of maximizing the net policy benefits (environmental and economic) by applying the principal–agent theory, which is a commonly used method of analyzing government incentive issues. Based on a detailed analysis of asymmetric information and of benefit conflicts between the government (the principal) and the investor (the agent), the optimal subsidy principal–agent model is established, in which the investor’s preference toward distributed PV generation is asymmetric and is described by a random variable. The equivalent model is then presented to obtain the optimal solutions, and a numerical example is provided to test the effectiveness of the model and to illustrate the implications of the solutions. The results show that high net policy benefits are directly influenced by a high investor preference. This emphasizes the importance for the government of improving the investor’s preference level and of eliminating asymmetric information to develop distributed PV generation and reduce subsidy costs. Additionally, lowering the market risk and enlarging the overflow value of distributed PV generation both contribute to subsidy cost savings. This paper offers policy makers an effective subsidy scheme to accelerate distributed PV generation development and will also be a useful reference for government to subsidize other renewable power systems to mitigate global climate and energy changes.